Sunday, May 13, 2012

Pre-Ordering Facebook Stock? Bad Idea

E*Trade allows you to "pre-order" Facebook Stock at a price to be announced.  Talk about buying a Pig in a Poke!

E*Trade has decided to let the small investor in on the Facebook deal.   If you answer a list of 30 questions and update your investor profile, you can get a brief glimpse of the 217-page Facebook Prospectus, and then "pre-order" the stock, at a price to-be-determined.

I tried to read the prospectus, but it "froze" my older version of Adobe, and wouldn't go beyond page 1.  That's alright, we've seen Zuckerberg's dick already, and he's hung like a mouse.   John Holms, he ain't, at least from a financial perspective.   The Facebook IPO is overvalued by a factor of five, in my opinion.

And the fact they are trying to attract the small, unsophisticated investor is very telling.   The institutional investors are wary of yet another dot-com IPO that will tank in value - after the debacle surrounding ZipCar, Groupon, and a host of others (even the GM offering has been, well, so-so).

To do this, they set up a new "IPO" section on E*TRADE and of course, the only IPO in that section is Facebook.   In other words, Facebook has its own section on E*TRADE.   What's next?   Will E*TRADE have a button we can check to "Like" a stock?   Oh, boy, here we go again!

This is a really bad idea for a number of reasons.

First, as noted above, when the small investor starts to speculate - in large numbers - the stock market collapses.    As one famous investor noted, back in 1929, "When the local grocery clerk started telling me about his stock portfolio, I knew it was time to get out of the market."

Simply stated, unsophisticated investors will invest in things based on brand names, media hoopla, and dreams of avarice.   They want to get-rich-quick, and thus are prone to both Greed and Fear.   They drive up the price of a stock, out of Greed, and then sell it in a panic, when it starts to dip.

These types of investors were behind the Real Estate meltdowns of 1989 and 2009, the gold booms of 1982 and 2012, as well as the dot-com booms of the late 1990's - and today.   They create havoc in the market.

And pandering to them, with this IPO, is a very bad idea.

The second problem, related to the first, is that this plays to the Casino Mentality of the market - the mentality sold wholesale to the small, unsophisticated investor.   Forget P/E ratios, Earnings per Share, dividends, or long-term values!   We are told that the almighty share price is all that matters, and how much the share price deviates within a month, a week, a day, an hour, or even minute-by-minute is all that matters, when it comes to investing.

And yes, there will be a few folks who make money on Facebook stock.   Some early investors will sell their shares once the secondary market opens up.   Like all IPOs before it - particularly the tech or dot-com kind, it will follow a predictable pattern of a sudden rise in price, followed by a fall, finally settling to what the market really values the stock at

A few small investors might make out - after all, one or two people win at a casino as well.   But most will lose, in the long run.   Only the insiders - who were given stock in lieu of pay - will "cash out" and make money.

The third problem is, of course, accepting orders from unsophisticated investors before the stock has been priced.   What idiot buys anything without knowing the price?  Would you go to a car dealer and say, "I want that car.  Here's a down payment, you tell me the price later on.  I trust you!"

Of course, you would not.   But for some reason, we are expected to do this with Facebook stock, which has launched a "roadshow" and prospectus, but has not figured out a stock price yet.

Pig-in-a-poke comes to mind.

Shame on E*TRADE for being part of this farce!